Venture Capital in The United States And Europe

[Pages:10]Occasional Paper 65

Venture Capital in The United States And Europe

Guillermo de la Dehesa

Group of Thirty, Washington, DC 1

Guillermo de la Dehesa is Vice Chairman of Goldman Sachs Europe and a Member of the Group of Thirty. The views expressed therein are those of the author and do not necessarily represent the views of the Group of Thirty. Copies of this report are available for $20 from:

Group of Thirty 1990 M Street, N.W., Suite 450

Washington, DC 20036 Tel.: (202) 331-2472 ? Fax: (202) 785-9423

E-mail - info@ ? WWW -

2

Occasional Papers No. 65

Venture Capital in The United States

And Europe

Guillermo de la Dehesa

Published by Group of Thirty? Washington, DC

2002 3

Contents

Page

I. Introduction

1

II. Defining Venture Capital

3

III. Supply and Demand

5

IV. The Benefits of Venture Capital

7

V. US and European Experience

with Venture Capital

11

VI. Reasons for Slower Venture

Capital Development in Europe

21

VII. What is Europe Doing to

Increase Venture Capital?

25

VIII. Conclusion

29

Bibliography

31

Membership of the Group of Thirty

33

Group of Thirty Publications Since 1990

35

I. Introduction

Venture capital is a form of financing in which investors do not purchase a stake in a going concern but support the creation and development of new companies through investments from the very early stages of business development through the launch of a company. Venture capital investment is associated with high levels of technology diffusion throughout the economy and high employment creation. For this reason promotion of venture capital formation has become an important goal of policy in most industrialized countries. In Europe, at the Nice European Council in December 2000, the Heads of State and Government of the 15 member countries described entrepreneurship as the central component of EU employment policy, with the development of a venture capital industry as a key element of that policy.

Despite this recognition, Europe lags far behind the United States in the size and depth of its venture capital markets. This is due, in no small part, to Europe's late start, with creation of the so-called New Markets only within the last decade compared to the formation of Nasdaq in 1971. This paper defines what is meant by venture capital, examines the supply and demand for this form of financing and what its benefits are. The paper then explores the differences between the US and EU experience, the reasons the EU is lagging and the specific steps now being taken to close the gap. While supporting the actions being taken to create the conditions for a more entrepreneurial and professional

1

venture capital industry, the paper concludes that, as with every issue related to human capital development, this will take time.

2

II. Defining Venture Capital

The category of investment known as "risk or venture capital" is the investment in unquoted companies by specialized venture capital firms. It is a subset of "private equity", that is, equity investment in companies not listed on a stock market, as opposed to equity investment in publicly traded companies.

Venture capital firms act as principals, that is, not as brokers or agents, managing the funds of individuals, institutions and their own money. There are six main financing stages in the venture capital process, related to the stages of development of venture-backed companies:

? The "early stage" involves financing before a venture initiates commercial manufacturing and sales, and before it generates a profit. This includes "seed" and "start up" financing, the former provided to research, evaluate and develop an initial concept, and the latter to support product development and initial marketing.

? "Expansion" financing supports growth and expansion of a company's manufacturing and sales capacity in order to generate profits.

? "Replacement" involves the sale of a portion of the existing shares to other venture capital companies or to other shareholders.

? "Management buyout" is financing provided to enable current operating management and investors to acquire the whole company, a product line or business.

3

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download